Morningstar | Advance Auto Parts Shares' Rally Validates Our View That Turnaround Effort Should Yield Results
Since narrow-moat Advance Auto Parts' stock approached $80 in November, it has nearly doubled and now trades near our $165 fair value estimate. We believe the surge validates our contention that sentiment was not adequately crediting management's work to improve service levels and efficiency, while placing undue emphasis on the threat of digital disruption; we think some investors misattributed sluggish 2017 sector performance to digital competition instead of the cyclical factors we identified as the culprit.We credit the rebound to signs that the turnaround effort is succeeding, such as 49 basis points of first-half adjusted operating margin expansion against 1% sales growth. While Advance's performance has long lagged its peers, service levels deteriorated precipitously after the firm's 2014 acquisition of General Parts. Although much work remains, we applaud management's focus on boosting part availability and service levels, critical to do-it-yourself and professional customers alike. Leadership's efforts were concealed by an industry slump and swirling fears that wide-moat Amazon would disrupt scaled retailers; we attributed the slowdown to transitory factors (weather and fleet composition issues) and concluded that scaled sellers' service levels would inhibit digital incursion.
Longer term, we expect mid-single-digit top-line growth with adjusted operating margins exceeding 11% by fiscal 2022, versus fiscal 2017's 7.3% mark. Our profitability outlook is more conservative than management's expectation for a rise to the low teens, potentially indicating upside.
While the shares have rallied, Advance's turnaround will take time, and so we expect the shares to remain more volatile than those of peers. While trading prices now reflect the firm's positive prospects, investors should be alert for future buying opportunities as the long-term trends and factors underpinning our investment thesis should endure.
Advance Auto Parts is an automotive aftermarket parts provider in North America, serving both professional installers (Professional), and do-it-yourself (DIY), customers as well as independently owned operators. The company's stores and branches provide a range selection of brand name, original equipment manufacturer and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. Through its integrated operating approach, the company serves its Professional and DIY customers through a variety of channels ranging from brick and mortar store locations to self-service e-commerce sites.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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